Supercommittee’s failure puts payroll tax cut at risk

The failure of the “supercommittee” raises the chance that working Americans will see their paychecks cut in January, and many economists say that could weaken an already vulnerable U.S. economy.

Last year’s payroll tax cut saved the average U.S. household more than $900, according to the Tax Policy Center. But because the supercommittee could not agree on a budget plan, the tax cut, as well as unemployment benefits, could expire at the end of the year.

“This is an immediate problem,” said Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities. “There will be damage if this isn’t extended.”

Economists at the country’s biggest banks have been concerned for months about damage to the economy if Congress didn’t act. In August, the authors of a Goldman Sachs report said that a failure to extend the payroll tax cut and benefits for the unemployed ranked among their three biggest worries for the U.S. economy, alongside Europe’s debt crisis.

Without the short-term stimulus, the analysts said, “fiscal drag will be intense in 2012,” raising the probability that the country will fall back into a recession.

Estimates vary on the extent that growth in the gross domestic product could suffer. Goldman Sachs economic forecaster Alec Phillips estimated that allowing the payroll tax cut to expire would reduce growth by as much as two-thirds of a percentage point in early 2012. Macroeconomic Advisers estimates that it would reduce GDP growth by 0.5 percent and cost the economy 400,000 jobs by the fourth quarter. Allowing unemployment benefits to lapse would result in the economy being slower by an additional quarter of a percent and cost 200,000 jobs.

Economists are troubled because forecasts for growth next year are already fairly low. Federal Reserve officials are estimating an increase of between 2.5 and 2.9 percent. Meanwhile, Europe’s debt crisis appears to be deepening, and the effects could spill over to the U.S. economy.

President Obama said at a news conference Monday afternoon that middle-class families “can’t afford to lose $1,000” a year if Congress doesn’t act. Many Republicans, however, are wary of spending the money.

Last year, Obama and Republican leaders struck a deal reducing employees’ share of the Social Security payroll tax from 6.2 percent of earnings to 4.2 percent. The Tax Policy Center says 121 million families have benefited this year, at a cost of roughly $120 billion.

In testimony last week before the Senate Budget Committee, Congressional Budget Office Director Doug Elmendorf cited continuing the payroll tax cut and extending unemployment benefits as efficient ways for the government to spend money to spur growth.

By comparison, policies that affect how much cash flow businesses have, such as reducing corporate taxes, would have a much smaller effect, Elmendorf said.

Bruce Bartlett, a former Reagan adviser, said the payroll tax cut is “better than nothing.” But he worried that many workers are saving the extra money, rather than spending it. Bartlett has argued in the past that the money would have been better allocated toward public works projects.

Joel Prakken at Macroeconomic Advisers said the benefits of the payroll tax were somewhat muted earlier this year because of a spike in gas prices. He added that an extension next year could produce greater benefits.

Economists also note that higher-income beneficiaries of the payroll tax cut are more likely to save the money. Lower-income recipients and people getting unemployment benefits tend to spend the money quickly on day-to-day necessities.

“A good case could be made you get more bang from your buck with unemployment benefits,” Prakken said.

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Jia Lynn YangJia Lynn Yang was the deputy national security editor at The Washington Post. She left The Post in September 2017.